Consolidated's legacy losses will pose business revenue challenges in 2017, says research firm

As Consolidated Communications realigns its focus to serve more business customers with fiber and IP-based Ethernet services, the rising tide of legacy TDM losses is a concern.

While Consolidated won’t report its third quarter revenues until November 3, next-gen IP services growth was certainly evident in its second quarter.

Consolidated’s fiber network investment strategy was a key contributor to its second quarter carrier and business revenue growth. Metro Ethernet circuits grew 19 percent while adding 3,000 new data connections. The telco’s business and broadband revenues now comprise 81 percent of the telco’s total revenues.

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At the time, Consolidated said metro Ethernet growth came at what has “historically been a seasonally soft quarter.” Total commercial and carrier revenues were $75.2 million, down slightly year-over-year from $76.6 in the same quarter a year ago, a product of customers transitioning away from TDM services.

Cowen and Company said in a research note that IP-based services will continue to help Consolidated keep losses at bay, but those services will take time to pay off.

“This should largely offset the declines in its legacy/subsidy businesses and we forecast a ~1% Y/Y decline in total revenue next year versus our expectation for a ~3% decline in 2016,” Cowen and Company said. “Given the continued revenue mix shift in its business though, we view meaningful upside to 2017 as less likely.”

As Consolidated looks to gain future growth in the business sector, the service provider is keen on acquiring more regional fiber providers that it can quickly integrate into its operations.

One of those acquisitions was Champaign Telephone Company (CTC). Consolidated immediately added 275 route miles of fiber and over 300 fiber-lit buildings to its footprint from the deal, enabling it to serve more enterprise and carrier customers.

Cowen said that because Consolidated must take on more debt, it does not expect the service provider to make a large, transformative deal.

“This could prove more difficult since its goal is to also have M&A be cash flow (per share) accretive within one year (after synergies),” Cowen and Company said. “As such, we believe it is more likely the company will continue to make smaller tuck-in acquisitions to continue to fill out its network.”